Why Goldman Sachs sees a ‘baby bear market’ in bonds

(MarketWatch) Betting against bonds has not, to say the least, worked well for the last 40 years or so.

The yield on the 10-year Treasury was close to 16% in 1981. This year it’s fallen below 1.5%. Yields move in the opposite direction to prices.

So the new Goldman Sachs call for a “baby bear market” in bonds is a noteworthy call of the day. The argument, laid out in the bank’s 10 market themes for 2020, is that the Federal Reserve is done cutting interest rates after three reductions this year.

The bank does admit that it will take a while for yields to rise. “We think the message from history is that bond yields will start rising when the market prices meaningful odds of rate increases, and that point still seems far off. Fed officials have signaled that they would like to be done with cutting but that the hurdle for hiking again is high. So, although we are cautiously optimistic on the global economy, we forecast only moderately higher 10-year Treasury yields next year, targeting a rebound to 2.25%, mostly skewed toward the second half of 2020,” the company says.

It expects emerging market equities generally, and cyclical stocks in both the U.S. and emerging markets, to rise a bit. “We expect moderately better economic and earnings growth, and therefore decent risky asset returns,” the research note says. “But we also see plenty of risks, and more challenging valuations, so the upside is limited.”


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